Book Review: Macey’s Corporate Governance

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3 Responses

  1. A.J. Sutter says:

    1. Your (and perhaps Macey’s) reference to investors’ participation “in the capital markets” implicitly assumes that the purpose of those markets is to provide capital. But in fact less than 1% of the total value of shares traded on the NYSE and NASDAQ each year is new capital. Moreover, a large portion of trades on those exchanges is high-speed, automated trading. Does Macey address these realities in his book, and how they might affect the deference that the law should accord to investors??

    2. You implicitly attribute to Macey the notion that incentives in the takeover market facilitate directors’ and managers’ keeping their “primary promise” to investors of “maximiz[ing] shareholder value.” (a) Does Macey consider this to be their primary promise outside the takeover context as well? (b) Does he consider the irony that “shareholder value” in the takeover context means the value one receives to terminate one’s status as shareholder?

    3. Does Macey consider that promises are made to any stakeholders other than shareholders?

  2. Mike Sirkin says:

    Hi A.J.,

    Thank you for reading and asking your questions. I will address each of them and will try to clearly differentiate between my own thoughts and Professor Macey’s expressed views.

    1. I appreciate your distinction between investors and traders. My personal view is that investors are interested in corporate governance because they part with their money in reliance on the corporation’s managers to put the money to a productive use and earn a return. Traders, by contrast, are not interested in corporate governance. They part with their money based on directional bets on companies, sectors, or the broad market indices, and are not interested in the governance of the underlying firms or in business performance. My own Coasean view is that the law promises traders functioning markets and information flows, and little else.

    Macey does not really address this reality in his book. My guess would be that he made a conscious choice not to address the topic in this work because it doesn’t really fit–if corporate governance is about promises, traders don’t rely on the same universe of promises from corporations as investors do.

    2.
    (a) Macey’s “Promise Premise” as I refer to it above is broad enough to allow for meaningful comparison between companies that make different sets of promises. Macey’s application of that premise in individual chapters to the different mechanisms or institutions of corporate governance reflects the reality that, in their current form, U.S. public companies exist for the benefit of their shareholders. This is not the only possible universe; Macey notes that some public companies in certain European countries exist for the benefit of a wider category of stakeholders. Under the law and the norms existing in the United States, though, public companies are primarily required to maximize shareholder value, in the takeover context as well as most other contexts. Under Delaware corporate law, directors owe fiduciary duties to their shareholders. Those duties become more pointed in the takeover context, where, in certain circumstances, the duty becomes that of an auctioneer determined to get the highest possible price. In the zone of insolvency, meanwhile, Delaware law allows for the circumstance that the duties owed to creditors become more prominent.

    (b) Macey does not explicitly consider the irony you point out, but there is another important irony to note. His emphasis on the efficacy of the takeover market is not based on the accomplishment of takeeovers at all. Rather, he values the incentives created by a well-functioning and unimpeded takeeover market. If one accepts that the primary promise made to shareholders in the U.S. is that the company will try to maximize shareholder value, then the constant threat of a takeovver is at least as important as the takeover itself. In the absence of antitakeover regulations and of defensive measures like the poison pill, the only effective defense against a potential takeover is to maintain a consistently high share price. Therefore, the true irony is that the unimpeded takeover market would work as an effective governance device even if no takeovers ever happened.

    3. As mentioned above, Macey allows for promises to stakeholders in his premise. He mentions firms in other countries who place greater emphasis on other stakehholders, including creditors and employees. The strength of his Promise Premise is that it allows for firms who openly make promises to stakeholders to exist and be evaluated according to their promises. In his application, though, Macey doesn’t discuss other stakeholders much, because of the fact that U.S. companies don’t either.

  3. Hi …

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    Other Applications of the Fibonacci Retracements and Extension
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    Application and Common Errors in Fibonacci Timelines
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